Point & Figure Charts were first constructed by Mr. Dow. The Point & Figure chart is a study of pure price movement. That is to say, it does not take time into consideration. Only the price changes are recorded. If no price change occurs, the chart is left untouched. Point & Figure charts do not display volume numbers. Although the volume numbers are not recorded on the Point & Figure chart, it does not necessarily follow that volume, or trading activity, is totally lost. On the contrary, since Point & Figure charts record all price change activity, the heavier or lighter volume is reflected in the amount of price changes recorded on the chart. Because volume is one of the more important ingredients in determining the potency of support and resistance levels, Point & Figure charts become especially useful in determining at which price level does most of the trading activity take place and, hence, where the important support and resistance numbers are. Point & figure charts also have an over 90% accuracy in predicting “targets”, i.e. how far a move will carry before buying power (or selling power) is dissipated.
An Average is a series of observations divided by the number of observations.
A Moving Average (MA) is the average price of the stock over the last N periods. There are three types of moving averages, simple (MA), weighted (WMA), and exponential (EMA). A simple moving average takes the data and makes a regular average. This is a great and easy method, but it is slow to keep up with the stock. A weighted moving average solves this by giving more weight to the more recent prices, and so it follows the price more closely. An exponential moving average solves this by giving an exponential weighting to each of the points, so that the older points decay away, rather than being lopped off. Often two moving averages are desired, a slower one (maybe 21 points) and a faster one (maybe 9 points). When the faster moving average crosses the slower, it may indicate that the trend is changing.
The MACD (Moving Average Convergence/Divergence) indicator is the result of the difference between a slower and a faster exponential moving average. A 9-point EMA of the difference is also plotted on the chart as the signal line. The MACD is very good at identifying the trend of a security (if there is one). When the MACD rises above the signal line, a bullish trend is indicated. Likewise, when the MACD falls below the signal line, a bearish trend may be forming. Not all securities trend in the same manner. Check the MACD against a few different securities. If a security’s price chart is reliably predicted by the MACD, then that security trends well.
Momentum is a measure of the security’s rate of change of price. If the closing price of today is higher than yesterday, momentum is positive. The indicator can be used like any other oscillator as it gives off overbought/oversold readings (the peaks and troughs in the chart).
Volume is the number of shares traded on a given day for that instrument (stock, bond, option, etc.). A volume increase accompanying a price breakout is very positive.
VSI (Volatility System Indicator): The Volatility Index measures the largest variation for a stock for one day. This could be the distance between the high & low for today, the distance between the close of yesterday and a high of today, or between the close of yesterday and the Low of today. It then compares this value with the values of the last 14 days to find whether this variation is getting larger or smaller. Successively larger variations suggest rising prices.
Relative Strength Index (RSI): Developed by Welles Wilder Jr. The RSI compares the average of up closes versus the average of down closes over the last (usually) 14 periods. This is plotted on a vertical scale from 0 to 100, 70 indicates an overbought condition, 30, an oversold. When the RSI’s values are overbought or oversold and then begin to diverge from price, this may be a warning of a trend reversal.